March 18, 2006
Unisuper v News Corp
In December of 2005 the Delaware Chancery Court decided Unisuper v New Corp, denying defendant's motion to dismiss in a claim by shareholders that a board had breached an agreement not to use a poison pill plan in exchange for the shareholders' affirmative votes on a proposal to change its place of incorporation to Delaware. The defendant board argued, citing three Delaware Supreme Court cases (Paramount, Quickturn, and Omnicare), that any such agreement is as restricting the board's inherent duty to manage the firm under Del. 141(a). Chancellor Chandler held that board agreements with third parties were distinguishable from agreements with all the shareholders and denied the motion to dismiss. The court reserved the issue of the appropriateness of agreements with some but not all of the shareholders. In reading the full opinion one sees a Chancellor working within a series of bad decision to reach the right result. The Supreme Court decisions hold that, as a matter of law, certain board contracts are void if they restrain the board's future discretion. The board in a merger agreement could not, for example, enter into deal protection provisions that stop the board from selling to a higher bidder. Of course, all contracts do this to some degree. A decision to contract to build a factory in A means that a later decision not to build is a contractual breach. At issue is the quality of the decision at the time of the contract, not whether the board is constrained financially later when it wants to change its mind and not build the factory. The Delaware Supreme Court opinions, attaching board contracts that restrict future discretion were necessarily overboard and Chancellor's opinion in News Corp is the beginning of an inevitable series of follow up opinions that limit the scope of the limitation on board contacts.
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